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Updated on Wednesday, January 16, 2019
There’s no doubt about it. Being your own boss certainly has its perks: you choose who to work with, the kind of projects you take on, the hours you work, and, more often than not, you’re doing exactly what you want.
But the autonomy doesn’t come without sacrifices. Being the sole decision-maker means you’re responsible for not only bringing in income, but also for the work required to keep the business up and running. That’s providing customer service, meeting legal guidelines, managing employees, promoting the business and keeping up with the competition. It’s no wonder many small business owners end up working long, late nights and average much longer hours than the 38.6 that is the national weekly average for workers in the U.S.
Still, most of those who started their own businesses say they would do it all over again if they could – even if they had to do the same back-breaking work for meager pay.
Average entrepreneur salary
There’s not many things that can bring more joy in a professional life than flexible hours and working toward a purpose. Being your own boss helps you do just that. What being your own boss doesn’t necessarily do is make you rich quick.
According to PayScale’s data, the average salary for a small business owner is $72,072, or anywhere between $30,104 and $182,229 in total annual earnings. Just to put that number in perspective, the average salary of a CEO — including those leading large corporations — is $161,361, according to PayScale, and the average wage worker makes about $56,492.80 a year in earnings, according to data from the Bureau of Labor Statistics.
The exact entrepreneur salary – like any kind of worker – varies greatly depending on the industry, the location of the business, and what kind of business the owner is running. For instance, a more scalable business in tech might afford a higher paycheck for the owner (computer and mathematical occupations earn an annual wage of $89,810, according to the Bureau of Labor Statistics), whereas the tighter sales margins in Main Street businesses have business owners forfeiting their salaries in the early years or putting their earnings right back into their businesses.
Looking at nationwide averages can also be misleading, as cost of living varies, but the Small Business Administration does break down the average income of small business owners by state. According to data from 2016, incorporated small businesses in California earned $57,420 annually, whereas a business owner from Vermont earned $45,415 (the profile of each state is listed here).
Why it’s important to set your own salary — and how to do it
In the beginning, when your business is in the developmental stage, how much you pay yourself might not be so important since that number is likely whatever is left over after overhead costs and taxes are paid.
But, as your business grows and you hire employees, determining how much to pay yourself can get convoluted. At this point, it’s important to be thoughtful in how you set your own salary.
Below are a few ways on how to do just that:
1. Check out what everyone else is doing
One way to determine how to pay yourself is to see what everyone else is going. When doing so, consider factors like regional standards, the industry you’re in, the development stage your business is in, how it’s performing, and whether you have employees to pay. There are plenty of online resources to check out, but also don’t shy away from asking other entrepreneurs you know. Finally, you can always seek the advice of an accountant who can help you manage profits to set a salary that makes sense.
2. Project pay based on profits
Once you’re out of the “startup” stage of the business, you’re generally also out of the “paying yourself enough to get by” phase. Based on past performances, you can forecast profits for the upcoming year and determine pay based on a percentage of that projected profit. A rule of thumb for most profitable small businesses is not paying themselves more than 50 percent of the profits.
3. Consider how your business is legally structured
Paying yourself too little can impact your lifestyle and overall life satisfaction, but paying yourself too much can raise red flags with the IRS. Take into account how your business is legally structured to set compensation. An accountant can help you determine if the percentage you take out meets IRS requirements.
The bottom line
Those long, late hours (and weekends) bent over your desk never seem so bad when it’s going toward building something you believe in. Hence, working longer hours while earning less usually doesn’t seem to deter the entrepreneurial spirit. However, no matter how happy you are doing what you’re doing, you still have to make a living. When you’re the boss, that means determining the right salary to pay yourself.
While there’s no magic formula, or right or wrong way of paying yourself, there are some important factors to keep in mind to make sure you’re abiding by laws and regulations, and accounting for business costs and investments toward future growth. After you’ve taken all of this into account and determined a number, remember to stay flexible.
Circumstances change in business, so be flexible when cash flow is tight, and be smart when the cash is flowing in more rapidly. While your paycheck is important, what’s more important is the long-term profitability and growth of your business.
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